Thursday, April 21, 2016

With the US presidential elections
in full swing this year and with the candidacy of Bernie Sanders for the
Democratic nomination, the argument over the federal minimum wage issue is now
penetrating the public sphere like never before. Yes, we did have the fast-food workers stage
protests in the past, demanding that they be paid a living wage. Now however, with Bernie Sanders taking the
issue on the campaign trail, it has become hard to ignore. Unfortunately, the argument has become
largely about ethics versus economics, with the ethical argument in favor of a
higher minimum wage, while the economic argument is largely used to oppose the
idea, arguing that it would lead to massive job loss, inflation, loss of
economic competitiveness as well as other typical arguments which were
typically used over the past decades.

While many of the economic arguments against raising the minimum wage may
have made perfect sense a few decades ago, in case many of us have not noticed,
we no longer live in the same economic environment we did for the past few
decades. Changes in the structure of the
economy, in large part brought about by globalization made most of those arguments largely irrelevant. One of the changes that took place has to do
with inflation. Inflation stopped being
a major problem in the past decade and a half or so, because the influx of much
cheaper goods coming from places like China, where labor and environmental
protection costs are much lower. Since
the 2008 crisis, deflation has become the bigger concern, not just in the
United States, but in the entire developed world, with even developing nations
such as in Eastern Europe and China experiencing a dramatic shift towards a
lower inflation environment. While the
US Federal Reserve target rate is an average of 2%, since 2014, inflation has
been hovering consistently under 1%.
2011 was the last year that inflation was above 2%. Needless to say therefore that inflation is
not really a huge problem right now, therefore a hike in the minimum wage would
not only be safe, but in fact beneficial, because it would be just the thing to
help the economy get back to the 2% inflation goal.

As far as job loss issue goes, it is
certainly true that higher wages would have an initial effect of causing some
job destruction. At the same time
however, we should keep in mind that there would also be the secondary
effect which I believe in this case would be more powerful than the primary
effect and the secondary effect would involve job creation through an increase
in consumer demand. In fact, our current
dilemma stems from a lack of consumer demand, which was also caused by the
effects of globalization. Wages have
risen dramatically in China for instance, taking hundreds of millions of people
out of poverty. In the US however the
effect of globalization is opposite.
Aside from the top 5% of households by income, pretty much all income
groups have experienced stagnation or a steep decline in real household income.

As we can see, aside from the top
five percent of households by income, most households have either stagnated or
are experiencing a decline in real income, which means that the US consumer’s
ability to increase consumption is in decline for over a decade and a half
already. The consumer debt bubble carried
the consumer after 2000, until that bubble burst, and since then the consumer
is being carried by the low interest rate environment, which is in effect
reducing the consumer’s interest burden, freeing up income to increase
consumption. The effects of the low interest rates are
also starting to wear off, because it is a one-time boost, which cannot be
replicated given that interest rates cannot go further down from here. An increase in the minimum wage is therefore
the only viable solution going forward, because there is no other viable way of boosting the consumer’s ability to continue increasing spending. In fact, if nothing is done, consumer spending
which makes up about 70% of the economy may end up contracting back to 2000
levels, causing a very nasty period of sustained economic contraction in the
process. For this reason, the economic
argument which currently mainly supports the idea that raising the minimum wage
is a bad thing, which will cause unwanted inflation and job loss is
flawed. The current path may in fact
lead to a much greater loss of jobs and the economy could get permanently stuck
in a deflationary cycle, as seems to be the case with Japan for decades now,
and Europe as well for the past few years, unless we start seeing some income
growth for the other 95% of households, not just the top 5%. A sure way to accomplish this would be to introduce a multi-year plan to get us to a much higher minimum wage compared with today.

About Me

Author of book "Sustainable Trade". Book's central subject is a proposal for the elimination of all current bilateral, and multilateral trade agreements, in favor of a new tariff system meant to encourage sustainability. Double honors degree in History and Anthropology, and a B.A in Economics.